consumer-reorganization

Chapter 13 is available only to individuals and married couples, not to partnerships, limited liability companies, or corporations. Chapter 13 is similar to Chapter 7 insofar as the automatic stay is concerned, with one notable exception:  in Chapter 13, co-signers are protected from creditors also, even though they did not file bankruptcy. Therefore, if a parent co-signed a vehicle loan, and the child files Chapter 13, then the creditor may not collect from the parent or the child, at least until it obtains permission to do so from the court.

Another important difference in Chapter 13 is that, unlike Chapter 7, the debtor is at no risk whatsoever of having the Chapter 7 trustee take any property from him/her/it for the benefit of creditors. The debtor is Chapter 13 is permitted to retain ownership and possession of all property. However, in Chapter 13 all creditors must still receive from the debtor the same amount of money that they would have received in Chapter 7, it’s just the way this happens differs substantially. In Chapter 7, the trustee takes property, sells it or otherwise reduces it to cash, and makes a distribution of the cash to creditors. In Chapter 13, the debtor is permitted to pay the money to the creditors over time in monthly installments over as much as five years.

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The debtor in Chapter 13 proposes a Chapter 13 repayment plan to the court and creditors and, if approved, pays money into the plan over time, usually 3 to 5 years. The Chapter 13 trustee disburses this money to creditors every month until the plan is completed, but the debtor is protected by the stay throughout the entire case, so that creditors are barred from trying to collect the debt by themselves.

In 2005, Congress passed bankruptcy reform legislation that was intended to force more consumers (not businesses) into filing Chapter 13, rather than Chapter 7. Under the new law, the debtor’s income is compared with the median income in the state in which the debtor resides.  If the debtor is below median, he or she may file Chapter 7. If his or her income is above median, then the debtor must go through a financial analysis to determine if he or she can afford to pay a substantial amount of money to creditors through Chapter 13. If the debtor can afford to pay between $6,000.00 and $10,000.00 (depending on the amount of debt the debtor has) or more to creditors over five years, then the debtor is required to file Chapter 13 rather than Chapter 7. The intent of Congress was to flush out the large number of debtors that Congress felt were abusing the bankruptcy system by filing Chapter 7 when they could afford to file Chapter 13. In practice, the legislation has confirmed that the large number of abusers never existed and has had little effect on the availability of Chapter 7 relief.

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